Richard Thaler’s work demonstrates why economics is hard

By R.A. | WASHINGTON

RICHARD THALER has won the Nobel prize in economic sciences this year for his contributions to behavioural economics. It's a well-deserved prize and a clarifying one, as far as economics is concerned. For a very long time, economists hoped to treat individuals a bit like particles in physics, whose activity can be described by a few well-understood rules, which allow researchers to model and understand complex interactions between particles. The rules, they reckoned, were things like perfect information, forward-looking reasoning and rationality. Of course economists understood that individuals didn't always behave according to those rules, but the idea was that, in aggregate, the rules would allow for a pretty good approximation of reality.

Then came the behavioural economists, who made it their task to find ways in which human activity systematically diverges from models using those basic assumptions. For many of them, the goal was probably to come up with an alternative set of principles describing human behaviour, so that economists could get back to the job of modeling the economy. That new set of principles never really emerged, just a bunch of behavioural oddities. As this week’s Free exchange column notes, one of the big achievements of the behavioural revolution has been to get economists as a whole to back away a bit from grand theorising, and to focus more on empirical work and specific policy questions.